India is witnessing a wave of urbanization. number for retail business has grown at 0.
s grown at 0.1x, which along with strong cash flow
Aspirations of higher income and higher from Rs 565 in FY12 to Rs 799 in FY17 generation, gives the company enough standard of living have drawn more people (Shoppers Stop Rs 765), or a 7% CAGR. capacity to suffer bad times. from villages to towns and cities. Though In fact, going by last years numbers, the some amount of this shift is happening to companys sales per square foot number Competitive advantage for V-Mart comes Tier-1 cities, there has been a significant from Tier-3 towns was around 20% than from its learnings over the years of increase in population of Tier-2 and Tier-3 what it earned in Metros and Tier-2 cities, managing prudent supply-chain system in cities as some of the businesses are shifting which talks about the purchasing power in low resourceful Tier-2 and Tier-3 cities, to these cities due to rising real estate costs the former and about the companys asset even as most other retailers have an in Tier-1 cities. With rising prosperity in productivity. Gross margin has been experience of doing things in the relatively Tier-2 and 3 cities, spending power too has around 25% over the years. The only real simpler to manage Tier-1 cities. Retail is a gone up and it offers a potential target advantage a retailer can have over competitive business and thus its market for the Indian retail industry. competitors is how it manages its costs, important for companies to manage their and whether it can keep them low vis--vis stores well. Maintaining low cost operation Retailers, especially in the organised competition. V-Mart scores well on this is critical. V-Marts management has segment are therefore targeting the account, with its various key cost heads like shown itself to be sensible on these middle-class populace by ensuring the rent and employees lower than accounts over the years. The company has availability of varied products at various competitors. The company gets this been almost debt-free throughout, margins price ranges to match the needs of the advantage by operating in Tier-2 and Tier- have remained stable and better than the common man. With rising per capita 3 cities, where the overall cost of doing industry, and inventory turns have income and large footfalls from business is low. improved. Plus, the management has been neighbouring smaller towns and villages, cautious on its growth aspirations. Overall, Tier-2 and Tier-3 cities are becoming a In retail, profitability is also critically a conservative approach towards growth, value proposition for organised retail to linked to the speed with which shelves can shunning debt and using internal expand its footprint. be evacuated, and success is derived from resources to fund the expansion, tight the knowledge of where merchandise lies control on costs, and high-quality V-Mart is one of the pioneers in India in across stores and superior inventory disclosures suggest a high-quality setting up stores in the value-for-money management. As a strategy, instead of management team at helm. retail segment across various small Indian rolling out stores at random, V-Mart opens towns and cities like Sultanpur, Ujjain and stores only within 150-kms from each As for risks, rise of e-commerce is one key Motihari, among others. Around 93% of other. This helps it leverage efficiencies in challenge to V-Marts business model and the companys sales is from high-margin brand spending, procurement, supply growth prospects. Competition may also apparels and general merchandise, and the chain, logistics and inventory intensify from multi-brand FDI in retail. remaining 7% is from the low-margin management. This strategy looks like what The industry has low entry barriers. Its not kirana (grocery) business. From 22 stores the US retail giant Wal-Mart adopted in its tough to open retail stores. However, (2.1 lakh square feet) in FY08, V-Mart has growing years setting up stores closer to understanding customer needs, managing increased its reach to currently operate 141 each other. Another good part of V-Marts supply chain, and learning curve should act stores (11.9 lakh square feet) spread across model is that instead of prevailing attitude as a source of competitive advantage for V- 150 cities, mostly in the states of Bihar and of other retailers to locate their stores in Mart. Uttar Pradesh. The company faces high-end malls, the company sets up its competition from retail majors like stores in downtown locations. The effect is The stock currently trades at around 53 Pantaloon, Trent and Shoppers Stop. seen in consistently positive and rising times its trailing 12-months earnings However, all these retail chains focus operating cash flows and a near zero-debt (earnings yield of 1.9%), which is mainly on Metros and Tier-1 cities, while situation, which is unlike most other significantly higher than the earnings V-Marts sole focus are Tier-2 and 3 cities. retailers. While its too short a time to call average multiple it has traded at over the It faces minimal competition from large this strategy fool proof and sustainable, the past few years. Free cash flow yield stands players in these cities. Rural India accounts management seems to be taking steps in at just about 1.3%. for two-fifths of the total consumption in the right direction to improve the India. And there are about 1,600 Tier-2 operational effectiveness of the business. Overall, V-Mart is a bet on the and Tier-3 cities in India. Which means the managements ability to exploit this big opportunity size for companies like V-Mart Return on equity stood at 15% in FY17, opportunity that lies ahead by replicating is huge, and there is a long runway for which is around the average V-Mart has the sensibility with which they have growth given the current under- earned over the past few years but managed their business in the past. But penetration in these markets. Competition significantly higher than what its larger like a lot of things can go right rising in V-Marts target cities comes from local peers like Shoppers Stop and Trent earn consumption, higher sales growth, and niche players. However, as its brand (negative to low single digits). The continued control on costs, greater cash image and value proposition grows, it is company is in a comfortable situation to flows lot of things may also go wrong bound to gain market share from local fund its growth through internal accruals greater competition, slower growth, rising players. cash from operations has been on a costs, and high financial leverage that consistent rise. Balance sheet has would cause them to be over-optimistic. Anyways, the companys sales growth remained lean over the years, especially While evaluating the business, understand during the past five years (FY12-FY17) has owing to good working capital the risks and opportunities better, and been around 29% CAGR, while net profit management. Working capital to sales, for then apply a margin of safety to assess growth has been around 30% CAGR. Sale instance, has come down from 21% in FY13 whether the stock is worth owning or not, per square foot per month critical to 12% in FY16. Debt/equity in FY17 stood and at around what price. Statutory Warning: This is NOT an investment advice to buy or sell shares. Make your own decision. I do not own the stock, but my analysis may be biased, and wrong. I, Vishal Khandelwal, am a registered Research Analyst as per SEBI (Research Analyst) Regulations, 2014 (Registration No. INH000000578).